Partnership Compensation: "Disequilibrium" Rules

Lockstep, modified-lockstep, lockstep with pay for performance, or pure "eat what you kill?"

This is an issue which has not, to say the least, achieved equilibrium.  "Equilibrium" in economics means something akin to what "climax phase" means in ecology:  The status towards which all disequilibrium states or transitional phases will evolve, assuming no external shocks.  For example, the "climax phase" of the ecology of the Adirondacks is old-growth mixed deciduous and evergreen forest.  A forest fire would drastically alter that ecology, but again, assuming no further external shocks (development, acid rain), it would eventually return to old-growth forest.

That digression aside, my hypothesis for what the equilibrium state of the partnership compensation model will be, is:

• Modified Lockstep

This is a very large topic, and a wonderfully dispassionate, broad, and distinctly smart piece about it is from Asian Legal Business.  Among its points:

• UK-based firms have been relatively slow to embrace any non-lockstep models, and their profitability per partner has suffered as a result.  Indeed, ALB chalks up the withdrawal of the noteworthy firm Denton Wilde Saptes from Asia to this syndrome.
• The UK/US philosophical-remuneration divide also, per ALB (and several other equally or better-informed sources) scotched Ashurst's merger discussions first with Latham & Watkins and later, more notoriously, with Fried-Frank.
• Lockstep, when it works, can be a beautiful thing, eliminating internal discord and focusing a firm outwards.
• But/And, Lockstep, when it does not work, can be stifling to innovation, can permit deadwood to survive, and can motivate high-performers to jump ship.

So why do I predict "Modified Lockstep" will inherit the earth?  Although none of the extant partner-remuneration models is perfect (otherwise every firm would have glommed on to that model), I think this is, all things equal, the optimal model:

• Reasonable, but not distorting (a la CEO stock options) incentives are maintained;
• Firm-wide unity is essentially maintained;
• For international firms, flexibility across regions and profit-centers is maintained;
• Slackers are discouraged, and ultimately eliminated; and last, and my favorite:
• Firms that have adopted it seem to be increasing their global market share at a convincing rate.

Q.E.D.?  Not quite yet, but I hope to put together some empirical evidence on this.